Sorry Folks, Raising The Minimum Wage Does Increase Unemployment

The Congressional Budget Office has cranked through the numbers for the proposed rise in the US minimum wage and it appears that it will put 500,000 people out of work.

Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects. As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.

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The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates. Moreover, the increased earnings for some workers would be accompanied by reductions in real (inflation-adjusted) income for the people who became jobless because of the minimum-wage increase, for business owners, and for consumers facing higher prices.

It’s still entirely possible to argue that this will be worth it: that 500k people thrown onto the dungheap of unemployment is a reasonable price to pay for higher incomes for some small fraction of the poor. But that is a pretty tough argument to make to be honest.

And this shouldn’t be a surprise either. For it’s pretty much the starting point of the whole subject of economics that if things rise in price then people buy less of that thing. Wages go up and employers will employ less labour. We’ve even got direct evidence of this. The Low Pay Commission, the people who set our own minimum wage in the UK, said several years back that the level of that minimum wage back then probably caused 30,000 job losses in the UK.

Again, we can say that that is all worth it but what we cannot say is that the policy has no costs.

Which is a pretty good guide to just about everything in economics in fact. Everything has benefits, everything has costs, the important question is always what is the balance? And don’t let anyone ever tell you anything different.